Fitch Affirms Stanley Black & Decker's IDR at 'A-'; Outlook to Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed Stanley Black & Decker, Inc.'s SWK ratings, including the company's Issuer Default Rating (IDR), at 'A-'. The Rating Outlook has been revised to Stable from Negative. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The ratings and Outlook for SWK reflect a geographically well-balanced company with leading market positions and strong brand recognition in its various business segments. The ratings also incorporate the cyclicality of certain of the company's end-markets and integration risk associated with its aggressive acquisition strategy, although overall risk is somewhat mitigated by merger integration expertise.

In October 2013, Fitch revised SWK's Rating Outlook to Negative from Stable, reflecting the company's high leverage relative to its rating level. Debt to EBITDA for the LTM period ending Sept. 28, 2013 was 2.8x and Fitch had expected leverage to settle around 2.6x at the end of 2013 and 2.0x by year-end 2014.

Today's rating affirmation and revision of SWK's Outlook to Stable from Negative reflects Fitch's expectation that the company's leverage will be at or below 2x at year-end 2014 and will be sustained at this level in the next few years.

CREDIT METRICS

SWK's credit metrics have shown improvement during the past 12 months, but the company's leverage ratio remains weak for the rating level. The company's EBITDA margins are up 86 bps for the latest-12-months (LTM) ending Sept. 30, 2014 compared with year-end 2013 and its debt to EBITDA ratio was 2.1x for the LTM period compared with 2.8x a year ago. Fitch expects leverage will settle at around 1.9x by year-end 2014 and roughly 1.7x at the end of 2015.

The company's EBITDA-to-interest was 10.3x for the LTM period ending Sept. 27, 2014 compared with 10.5x at year-end 2013 and 11.1x at the end of 2012. Fitch expects interest coverage will remain above 10.0x at the end of 2014 and 2015.

ACQUISITION STRATEGY / PORTFOLIO TRANSFORMATION

The company has pursued a growth strategy that has resulted in geographic, end-market and customer diversification. The company is a diversified global provider of power and hand tools, mechanical security and electronic security and monitoring systems, and products and services for various industrial applications. Sales outside of the United States now account for roughly 53% of total revenues, up from roughly 43% in 2008. Additionally, management estimates that revenues directed to the construction and auto markets have declined from about 76% of its 2010 pro forma revenues to approximately 64% of 2013 pro forma sales. Reliance on home centers and mass merchants have also decreased, accounting for about 18% of 2013 sales, down from 40% during 2002.

Fitch was somewhat concerned during the past year that the company continued to do acquisitions while it was still integrating large acquisitions. The sizeable Black & Decker acquisition, which was completed in 2010, was only been fully integrated last year. Yet, since 2010, the company has spent about $3.4 billion on more than 30 acquisitions, including three sizeable entities.

During the first quarter of 2013, SWK acquired Infastech for $826.4 million. Infastech designs, manufactures, and distributes highly-engineered fastening technologies and applications for various end markets. During the third quarter of 2011, the company completed the $1.2 billion acquisition of Niscayah, a commercial security firm based in Sweden specializing in electronic security systems. In July 2010, SWK also completed the $451.6 million acquisition of CRC-Evans, a supplier of specialized tools, equipment and services used in the construction of large-diameter oil and natural gas transmission pipelines.

The integration risks are somewhat mitigated by management's integration expertise as well as the fact that assimilation activities are occurring in different business segments, allowing each segment's management team to focus specifically on each individual acquisition. Nevertheless, there have been challenges in integrating the acquisition of Niscayah, including high attrition rates and slower than expected operating margin improvement, leading to organic growth shortfalls and low margins. The company has taken steps to correct several structural challenges, including rebuilding this segment's sales force and changing leadership teams. Management is also finalizing its review of strategic alternatives for its Security business in Southern Europe, which is expected to be completed by year-end 2014.

The company also curtailed acquisitions this year in an effort to delever its balance sheet. Furthermore, integration remains a top priority, and management has indicated that it will continue to curtail major acquisitions through 2015 while it completes its ongoing integration activities.

SOLID LIQUIDITY POSITION

As of Sept. 27, 2014, SWK had $486.8 million of unrestricted cash ($439 million of which are held in foreign jurisdictions) and $1.57 billion of capacity under its $2 billion CP program that is backed by the company's $1.5 billion multi-year revolver. The company has sufficient cushion under its financial covenants, which allows the company to have continued access to its credit facility.

SWK generated $664.9 million of free cash flow (FCF: cash flow from operations less capex and dividends) for the Sept. 27, 2014 LTM period compared with $189.7 million in 2013, $276.2 million in 2012 and $420.9 million in 2011. Fitch expects FCF will be roughly 3% - 4% of revenues in 2014 and will approximate 5% - 6% next year.

CYCLICALITY OF END MARKETS

SWK is exposed to cyclical end markets including new residential and commercial construction, residential and commercial repair and remodel and the automotive industry. For fiscal year 2013, management estimates that approximately 53% of its sales were directed towards the worldwide construction sector (down from 66% during 2010) and 11% to the automotive industry. Sales to the U.S. construction sector accounted for about 29% of revenues.

Fitch currently has a stable outlook for the U.S. construction market as well as the global automotive industry.

Overall U.S. construction spending grew 6.8% to $623.1 billion during first eight months of 2014 from $583.2 billion during the same period last year. Spending for private residential and nonresidential construction remained robust, while total public construction spending was flat, although highway and street spending improved slightly during the period. Fitch expects total U.S. construction spending will increase about 6% during 2014. Further gains are projected next year as Fitch expects continued growth in construction spending during 2015.

After weather-driven weakness in the first quarter of 2014, U.S. auto sales have picked up, with the seasonally adjusted annual rate (SAAR) of sales averaging 16.9 million in the June through August period. Fitch expects the sales rate to moderate somewhat in the fourth quarter but still remain above earlier expectations. As such, Fitch recently raised its full-year 2014 sales forecast to 16.3 million (a 3% increase over 2013) from 16 million.

Outside the U.S., conditions in the global auto market remain mixed. Despite various concerns, China continues to post solid, but slowing, growth, while Western Europe is also growing, but absolute sales in that region remain weak. India may be turning a corner now that elections are over and a new political regime is in office, but conditions in Brazil remain challenging and the Russian market has weakened considerably over the past several months. Fitch expects overall global vehicle sales will grow low-single digits this year and a similar level of increase next year.

RATING SENSITIVITIES

Future ratings and Outlooks will be influenced by broad end-market trends, as well as company specific activity, particularly FCF trends and uses and liquidity position.

SWK's credit metrics are currently weak and has limited financial headroom for the 'A-' rating level. Negative rating actions could occur if the recoveries in SWK's end-markets dissipates and affects volumes, and/or sustained cost pressures contract margins, leading to weaker than expected financial results and credit metrics (including EBITDA margins below 14%, debt to EBITDA consistently above 2x and interest coverage below 9x). Additionally, Fitch may consider a negative rating action if management undertakes a meaningful share repurchase program or completes a major acquisition funded by debt while its credit metrics are weak, resulting in debt to EBITDA levels above 2x.

While Fitch does not currently anticipate a positive rating action in the next 12-18 months, a positive rating action may be considered if the company shows significant improvement in its operating results, leading to sustained improvement in credit metrics (particularly debt to EBITDA levels in the 1x-1.5x and interest coverage above 12x), and a continued robust liquidity profile.

Fitch affirms the following ratings for SWK:

--IDR at 'A-';

--Bank credit facilities at 'A-';

--Senior unsecured notes at 'A-';

--Junior subordinated notes at 'BBB';

--Junior subordinated debentures at 'BBB';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Additionally, Fitch also affirmed the following ratings:

Black & Decker Holdings LLC

--IDR at 'A-';

--Senior unsecured notes at 'A-'.

Fitch has also affirmed and subsequently withdrawn the following rating:

Black & Decker Corporation

--IDR at 'A-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Dec. 23, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=913235

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